Despite US air strikes beginning on Iraq rebels, crude oil prices are unlikely to go up dramatically as other producers in Organization of Petroleum Exporting Countries (Opec) are capable to meet any shortfall in production and supply, experts say.
On Friday, US military aircraft conducted an airstrike against rebel group ISIS, which has swept the northern parts of the embattled country.
Prices crude had earlier spiked close to nine-month high of $117 per barrel at the start of the offensive by the group, but fell back as as the oil infrastructure in the south of Iraq remained mainly unaffected.
After US President Barack Obama authorised air strikes on Iraq, Brent crude rose almost by $1 to reach days high of $106.8/barrel, but later recovered and was trading at $105.35, down $0.10 on Friday evening. On the New York Mercantile Exchange, light, sweet crude futures for delivery in September traded up 0.6% at $97.22 a barrel.
"In near term crude prices could go up to $112-$115/barrel, purely driven by sentiments. If oil wells in southern region are struck then it may significantly impact fuel supply from Iraq. If the supply is completely hindered from Iraq then prices could go beyond $120 per barrel. However, possibility of such event is rare," Debashish Mishra, partner at Deloitte told dna.
He said even if Iraq supply drops drastically, Saudi Arabia which has excess capacities can make up for supply shortfall.
"Nonetheless, if US has started striking ISIS, it will weaken them, which is actually a positive development," Mishra said. Iraq currently supplies around 3.2 million barrels of crude per day.
India imports close to 2 million barrels/day from Iraq. The country was India's second-largest supplier of crude oil in the last fiscal with 10.1% share after Saudi Arabia (18.1%).
The air strikes and majority of ISIS fighting is currently restricted to northern part of Iraq. While the major producing oil fields are in the south. Most of Iraq's oil facility is located in the south, which remains in control of the Iraqi government. The large Rumaila oil field producing 1.5 million barrels per day of oil is also located in the southern region.
Most commodity experts said the crisis was not very serious. However, if crude continues to go up and if rupee also depreciates simultaneously then it could brew fresh trouble for India, which has been trying to bring down its under-recovery on sale of diesel sales.
Rupee today plunged by 52 paise to a five-month low of 61.74 against the dollar with rise in oil prices, but it recovered later to close at 61.15.
"Under-recovery in diesel which had come down to Rs 1.33/litre was expected to be completely wiped out in couple of months. However, rise in crude price and rupee depreciation may further delay complete deregulation of diesel. This could be sentimentally negative for oil retailers," Dhaval Joshi, an analyst from Emkay Global Financial said.